SunTrust 2015 Annual Report Download - page 110

Notes to Consolidated Financial Statements, continued
82
residential mortgages continue to accrue interest regardless of
delinquency status because collection of principal and interest
is reasonably assured by the government. Nonguaranteed
residential mortgages and residential construction loans are
generally placed on nonaccrual when three payments are past
due. Residential home equity products are generally placed on
nonaccrual when payments are 90 days past due. The exceptions
for nonguaranteed residential mortgages, residential
construction loans, and residential home equity products are: (i)
when the borrower has declared bankruptcy, in which case, they
are moved to nonaccrual status once they become 60 days past
due, (ii) loans discharged in Chapter 7 bankruptcy that have not
been reaffirmed by the borrower, in which case, they are
reclassified as TDRs and moved to nonaccrual status, and (iii)
second lien loans, which are classified as nonaccrual when the
first lien loan is classified as nonaccrual, even if the second lien
loan is performing. When a loan is placed on nonaccrual, accrued
interest is reversed against interest income. Interest income on
nonaccrual loans is recognized on a cash basis. Nonaccrual
residential loans are typically returned to accrual status once they
no longer meet the delinquency threshold that resulted in them
initially being moved to nonaccrual status, with the exception of
the aforementioned Chapter 7 bankruptcy loans, which remain
on nonaccrual until there is six months of payment performance
following discharge by the bankruptcy court.
TDRs are loans in which the borrower is experiencing
financial difficulty at the time of restructure and the borrower
received an economic concession either from the Company or
as the product of a bankruptcy court order. To date, the
Company’s TDRs have been predominantly first and second lien
residential mortgages and home equity lines of credit. Prior to
granting a modification of a borrower’s loan terms, the Company
performs an evaluation of the borrower’s financial condition and
ability to service under the potential modified loan terms. The
types of concessions generally granted are extensions of the loan
maturity date and/or reductions in the original contractual
interest rate. Typically, if a loan is accruing interest at the time
of modification, the loan remains on accrual status and is subject
to the Company’s charge-off and nonaccrual policies. See the
“Allowance for Credit Losses” section below for further
information regarding these policies. If a loan is on nonaccrual
before it is determined to be a TDR then the loan remains on
nonaccrual. Typically, TDRs may be returned to accrual status
if there has been at least a six month sustained period of
repayment performance by the borrower. Generally, once a loan
becomes a TDR, the Company expects that the loan will continue
to be reported as a TDR for its remaining life, even after returning
to accruing status, unless the modified rates and terms at the time
of modification were available to the borrower in the market or
the loan is subsequently restructured with no concession to the
borrower and the borrower is no longer in financial difficulty.
Interest income recognition on impaired loans is dependent upon
accrual status, TDR designation, and loan type as discussed
above.
For loans accounted for at amortized cost, fees and
incremental direct costs associated with the loan origination and
pricing process, as well as premiums and discounts, are deferred
and amortized as level yield adjustments over the respective loan
terms. Fees received for providing loan commitments that result
in funded loans are recognized over the term of the loan as an
adjustment of the yield. If a loan is never funded, the commitment
fee is recognized in noninterest income at the expiration of the
commitment period. Origination fees and costs are recognized
in noninterest income and expense at the time of origination for
newly-originated loans that are accounted for at fair value. For
additional information on the Company's loans activities, see
Note 6, “Loans.”
Allowance for Credit Losses
The allowance for credit losses is composed of the ALLL and
the reserve for unfunded commitments. The Company’s ALLL
is the amount considered appropriate to absorb probable current
inherent losses in the LHFI portfolio based on management’s
evaluation of the size and current risk characteristics of the loan
portfolio. In addition to the review of credit quality through
ongoing credit review processes, the Company employs a variety
of modeling and estimation techniques to measure credit risk and
construct an appropriate and adequate ALLL. Quantitative and
qualitative asset quality measures are considered in estimating
the ALLL. Such evaluation considers a number of factors for
each of the loan portfolio segments, including, but not limited
to, net charge-off trends, internal risk ratings, changes in internal
risk ratings, loss forecasts, collateral values, geographic location,
delinquency rates, nonperforming and restructured loan status,
origination channel, product mix, underwriting practices,
industry conditions, and economic trends. Additionally,
refreshed FICO scores are considered for consumer and
residential loans and single name borrower concentration is
considered for commercial loans. These credit quality factors are
incorporated into various loss estimation models and analytical
tools utilized in the ALLL process and/or are qualitatively
considered in evaluating the overall reasonableness of the ALLL.
Large commercial (all loan classes) nonaccrual loans and
certain consumer (other direct, indirect, and credit card),
residential (nonguaranteed residential mortgages, residential
home equity products, and residential construction), and certain
commercial (all classes) loans whose terms have been modified
in a TDR are reviewed to determine the amount of specific
allowance required in accordance with applicable accounting
guidance. A loan is considered impaired when, based on current
information and events, it is probable that the Company will be
unable to collect all amounts due, including principal and
interest, according to the contractual terms of the agreement. If
necessary, an allowance is established for these specifically
evaluated impaired loans. The specific allowance established for
these loans is based on a thorough analysis of the most probable
source of repayment, including the present value of the loan’s
expected future cash flows, the loan’s estimated market value,
or the estimated fair value of the underlying collateral. Any
change in the present value attributable to the passage of time is
recognized through the provision for credit losses.
General allowances are established for loans and leases
grouped into pools based on similar characteristics. In this
process, general allowance factors are based on an analysis of
historical charge-off experience, expected loss factors derived
from the Company's internal risk rating process, portfolio trends,
and regional and national economic conditions. Other
adjustments may be made to the ALLL after an assessment of
internal and external influences on credit quality that may not be
fully reflected in the historical loss or risk rating data. These